Investing abroad may present lucrative opportunities in the form of new markets and customers. Hospitality companies, however, often face unique challenges when doing business abroad. For example, in 2009, Venezuelan President Hugo Chavez ordered the expropriation of a Hilton-run hotel on the resort island of Margarita to help develop tourism projects within a socialist framework. Similarly, in 2011, the Sri Lankan government declared ownership of a Hilton-run hotel in Colombo following a dispute with the foreign investor. Hospitality companies considering investing abroad thus should be aware of the tools that may be available to protect their international investments.
One tool is the bilateral investment treaty (“BIT”), which is an international treaty between two countries that protects international investments. BITs may provide valuable leverage in negotiations with government officials and allow an investor direct recourse to international arbitration to resolve disputes. BITs thus provide protection to international investors from political risk and even counterparty risk.
There currently are approximately 3,000 BITs. The United States has around 40 BITs, with countries such as Argentina, Croatia, Ecuador, Jamaica, and Panama.
BITs typically protect “investments” by “investors” of one country that are made in another country. Most BITs broadly define “investments” as “every kind of asset” and generally will cover international investments made by hospitality companies, including hotel ownership, lease and management contracts, and franchise agreements.
A hospitality company also must qualify as an “investor” under the BIT. Most BITs define an “investor” as a corporation that is incorporated in one of the countries that is party to the BIT.
In the absence of a BIT, hospitality companies interested in investing abroad should consider structuring their investments through existing foreign subsidiaries to potentially gain access to BIT protections. For example, there is no U.S.-Cuba BIT, but a U.S. hospitality company may be entitled to access the protections in Cuba’s BITs with France or Germany by structuring its investment through an existing European subsidiary.
In the event that a dispute arises with respect to a hospitality company’s international investment, most BITs provide that the company may commence international arbitration against the foreign government. As opposed to litigating in domestic courts that may be biased in favor of the government, international arbitration offers a neutral forum, provides parties with more flexible procedures, and may be faster. In addition, international arbitration awards may be overturned only on limited grounds, and are easier to enforce abroad than domestic court judgments.
Hospitality companies have recovered significant sums in international arbitrations brought against governments pursuant to BITs. For example, in Siag v. Egypt, Italian investors purchased a 161-acre parcel of oceanfront land from the Egyptian Ministry of Tourism for the purpose of developing the property into a tourist resort. After Egypt later seized the land, the investors commenced international arbitration pursuant to the Italy-Egypt BIT. The tribunal found that Egypt had violated the BIT and awarded $127 million.
Hospitality companies thus would be well-advised to consider BITs when planning international investments as well as when disputes arise with respect to existing international investments.
About the Author
Charles (“Chip”) B. Rosenberg is an associate at White & Case LLP’s International Arbitration Group.